Ferroglobe - Q2 2024

Transcript

Operator (participant)

Good morning, good afternoon, welcome to Ferroglobe's Second Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin.

Alex Rotonen (VP of Investor Relations)

Thanks, Roz. Good morning, everyone, and thank you for joining, excuse me, Ferroglobe's second quarter 2024 conference call. Joining me today are Marco Levi, our Chief Executive Officer, and Beatriz García-Cos, our Chief Financial Officer. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to slide two at this time. Statements made by management during this conference call that are forward-looking are based on current expectations. Factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibit to those filings, which are available on our webpage at ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share, and among other non-IFRS measures.

Reconciliations of non-IFRS measures may be found in our most recent SEC filings. Before I turn the call over to Marco Levi, our Chief Executive Officer, I want to announce that we'll be participating in Seaport Research Partners' Annual Summer Investor Conference on August 20th and 21st. We hope to see you there. Marco?

Marco Levi (CEO and Executive Director)

Thank you, Alex, and good morning, good day, and good evening to everyone. Thanks for joining us on the call today. We appreciate your interest in Ferroglobe. Before I begin with our quarterly earnings update, I want to inform you with deep regret that Juan Miguel Villar Mir, founder and former chairman of FerroAtlántica, our legacy company, passed away last month. I would like to express our deepest condolences to his family. In Q2, we continued to execute well, driving strong financial performance with increased volumes, revenues and Adjusted EBITDA. As we discussed in our first quarter call, in May of this year, the US International Trade Commission recognized that imports of ferrosilicon from Russia, Kazakhstan, Malaysia and Brazil, which represented approximately 70% of all imports in 2023, are injuring our US operations.

The substantial government subsidies are received in these countries, and the low selling prices of these imports have adversely impacted the U.S. ferrosilicon market, hurting local producers and their ability to compete. The ITC's final decision will be made in October. On June 24th, the U.S. Department of Commerce announced preliminary antidumping and countervailing duties of 283% and 748%, respectively, on all Russian imports of ferrosilicon. As a result, all importers of Russian ferrosilicon are required to post cash deposits or bonds to cover these duties. Russia represents approximately 35% of all ferrosilicon imports into the U.S. in 2023. This is a significant victory for our industry, allowing us to compete on a level playing field. The investigations of the remaining three countries, Kazakhstan, Malaysia, and Brazil, are still underway.

The International Trade Commission will announce preliminary determinations for countervailing duties expected in August and antidumping duties in October. We believe these decisions will have a positive impact on our business in 2025, as inventory in the channel is depleted. As you recall, during the first quarter, we signed an MOU with Coreshell to further develop batteries for EVs using silicon-rich anodes. We are very excited about this relationship as it enables us to take part in the evolution of EV batteries. In testing, Coreshell has achieved a high cycle lifetime using an 80% Ferroglobe silicon content anode in a Coreshell battery. This improvement in battery performance is an important milestone. The benefit to consumers is that the silicon-rich anode significantly reduces the cost of batteries, speeds up the charging time to just 10 minutes, and increases the range up to 40%.

The next step is to produce a commercial-sized battery that OEMs can begin testing, begin testing, sorry. Coreshell has closed its financial round, targeting the development of a pilot plant that will produce larger 60 ampere cells for the OEM testings. This project is on track, with commissioning scheduled to begin in Q4 of this year, and testing at OEMs expected in early 2025. We'll keep you informed as we continue to achieve new milestones. In addition to develop silicon, to developing silicon rich anodes with Coreshell, we are working approximately with 70 EV battery companies to also develop other silicon-based technologies, such as silicon carbon composites and silicon monoxide anodes for batteries. These technologies, while less efficient than silicon batteries, are either in use or expected to enter the market in 2025.

While prices in general have been strong during the first half of the year, they have been very driven more by supply constraints than a fundamental improvement in demand. Strong index prices in the second quarter should drive solid results in Q3. However, we are still cautious about the fourth quarter given the uncertainty in the market, especially as it relates to the aluminum, foundry, and steel sectors. We continue to enhance our capital return policy. In addition to paying a quarterly dividend of 1.3%, 1.3 cents per share, our share buyback program was approved in June. We are narrowing the adjusted EBITDA guidance range from $130-$170 million to $150-$170 million.

The strong second quarter, combined with higher index prices, should positively impact the third quarter, which gives us more confidence for the second half of the year. However, given the weak demand, we are still cautious about the fourth quarter, and combined with the idling of French operations, we anticipate having the lowest Adjusted EBITDA of the year in the fourth quarter. Next slide, please. Our second quarter performance was strong, with total sales increasing by 15% from the prior quarter to $451 million, and Adjusted EBITDA reaching $58 million, up from $26 million, driven by strong pricing and sales volumes. Operating cash flow and free cash flow were $2 million and $-20 million, respectively, due to inventory build as we started France, and made a calculated decision to purchase incremental tons of manganese ore in anticipation of price increases.

Beatriz will discuss this in more details as she reviews the financial results. Next slide, please. Silicon metal revenue in the second quarter was $204 million, up 22% from the prior quarter. This increase was a result of higher prices and higher volumes. Average realized prices increased 2.8%, while shipments increased 18.2% to almost 63,000 tons, driven primarily by strong sales to the chemical sector in Europe. The volume shift in the second quarter was the highest level in the past two years. Index prices in Europe, which were down slightly in the second quarter, were negatively impacted by lower priced Chinese exports and weakened the markets, particularly the aluminum sector, which was affected by high energy prices in Europe.

Prices in North America were strong in the second quarter, as it benefited from supply constraints such as the Baltimore Bridge accident. In addition, high tariffs make Chinese silicon metal imports a known factor in the U.S. market. Silicon metal Adjusted EBITDA was $35 million, an increase of 115% over the prior quarter, driven by strong volumes, higher prices, and lower costs. Given weak demand in end markets and easing supply constraints, we expect the index prices to soften into the third and fourth quarters. With a typical three-month lag in pricing, we expect the third quarter results to be relatively stable but weaker in the fourth quarter. In addition, we expect France to be idled toward the end of the year, which will also impact fourth quarter results. Next slide, please. Silicon-based alloys.

The revenue in the second quarter was $105 million, down 6% from the prior quarter. This revenue decline was a result of lower shipments, which were down 8% from the prior quarter, partially offset by a 2.4% increase in prices. Index prices in North America were up versus the first quarter, while Europe was relatively flat during the second quarter. Adjusted EBITDA was $10 million in the second quarter, down 29% from the first quarter. This decrease was the result of a higher cost due to the idling of French operation in the first quarter, and lower absorption cost in the U.S. Weak shipments were primarily driven by a 19% decline in North America, which has negatively impacted by high inventories due to Russia selling subsidized low price FeSi production in the U.S.

Excessive Russian shipments have led to a high level of inventory in the channel, which we expect will be depleted over the next couple of quarters. This will negatively impact demand until inventory levels normalize. However, as a result of the tariffs recently imposed on US imports of FeSi, we anticipate an increasing demand beginning in the first quarter of 2025, as imports from the affected countries will be reduced. This is expected to give Ferroglobe an opportunity to expand its market share in the region. Given the current economic uncertainty, we expect European and US wheel demand to remain soft for the second half of the year. To the next slide, please. Turning now to manganese-based alloys. Manganese-based alloy revenue in the second quarter was $98 million, up 48% from the prior quarter.

This revenue increase was a result of higher shipments of 81,000 tons, up 31% from the prior quarter, and higher realized prices, which increased 13%. We capitalized on South32 high-grade manganese ore mine shutdown, which was damaged by Cyclone Megan in late March, by building higher inventory levels of manganese ore before the resulting shortage drove market prices higher. This enabled us to ship the highest volume of manganese alloys in the past 8 quarters. Manganese alloy index price increased during the second quarter, driven by a shortage of high-grade manganese ore caused by this shutdown. Adjusted EBITDA was $14 million, up from $6 million in the first quarter. This represents an increase of over 150%. Price, and to a lesser extent, volume, drove the increase in EBITDA, partially offset by higher costs.

European end markets continue to be weak, and we expect our volume to normalize in the second half. It is important to note that nearly all our end market for manganese alloys is in Europe. Now, I would like to turn the call over to Beatriz García-Cos, our Chief Financial Officer, to review the financial results in more detail. Beatriz?

Beatriz García-Cos (CFO)

Thank you, Marco. Please turn to slide 10 for a review of the income statement. Sales increased 50% in the second quarter to $451 million, up from $392 million in the prior quarter. During the second quarter, we saw increased volumes in silicon metals and manganese alloys, and higher selling prices across all three segments. Raw material and energy consumption for production remained broadly flat and decreased as a percentage of sales from 66% to 59% in the second quarter, primarily due to effective cost management and higher fixed cost absorption as a result of increased volumes. Other operating expenses for the quarter increased by 64% to $86 million, partially driven by a $19 million increase due to the fair value adjustment of the free carbon credits.

This is fully offset by an increase in other income. Staff costs decreased by $3 million in the second quarter to $67 million, due to the profit sharing arrangement in Europe during the first quarter. Adjusted EBITDA in the second quarter more than doubled to $58 million, from $26 million in the prior quarter. During the quarter, we earned approximately $8 million from our 2024 French energy agreement, in line with the first quarter. As a reminder, cash from these benefits is expected in early 2025. Net financial expenses for the quarter declined 31% to $5 million, due to the full redemption of the senior secured notes in February. Going forward, we expect interest expenses to normalize below these levels. Next slide, please.

Our adjusted EBITDA margin increased from 7% in the first quarter to 13% in the second quarter, primarily due to increased pricing and volumes, which impact EBITDA by $80 million and $11 million, respectively, relative to the first quarter. The higher costs were driven by the mark-to-market earnout provision in the manganese business, partially offset by higher fixed cost absorption in France and Spain. Overall, average selling prices increased by 2.5%, positively impacting adjusted EBITDA by $80 million, $10 million of which was from manganese-based alloys. Total volume increased by 50% with an $11 million positive impact on adjusted EBITDA compared to the prior quarter, thanks to increased silicon metal sales to the chemical sector in Europe. Head Office and non-core business contribute approximately $5 million to increase EBITDA, driven by lower G&A costs. Slide 12, please.

So in the second quarter, we consumed free cash flow of $30 million, primarily due to the need to build up inventories from the end of Q1, during which the French plants were idle and higher manganese ore prices following South32 mine shutdown. Working capital was a use of $30 million, driven by a $37 million inventory build as we restart operations in France. In addition, after the South32 mine disruption, we purchased incremental inventories of manganese ore. This inventory increase was partially offset by trade receivable reduction of $6 million and an increase of $17 million in payables. CapEx outflows in the first quarter were $22 million versus $18 million in the prior quarter.

In addition, we paid cash taxes totaling $9 million related to 2023, plus an estimated tax payments for 2024. Last quarter, we continued our quarterly dividend in the amount of $0.013 per share, which was paid on June 27, and we will be paying our third quarter dividend of $0.013 per share on September 27. In an effort to continue enhancing our capital allocation policy, we have finalized the share buyback program, which was approved at the June AGM. We have authorization to repurchase up to 37.8 million shares over a 5-year period through both discretionary and non-discretionary purchases. Next slide, please. We end the second quarter with a cash balance of $144 million, down from $160 million in the first quarter.

This reduction in cash is driven by the inventory build-up, as I have just discussed. We continue to run the business on a net cash positive basis for the second quarter in a row. Our gross debt remained flat at $81 million. We remain committed to maintain a conservative balance sheet. However, we continuously explore opportunities to prudently add additional liquidity to enhance our financial flexibility. At this time, I will turn the call back over to Marco. Next slide, please.

Marco Levi (CEO and Executive Director)

Thank you, Beatriz. Moving to the key takeaways on slide 15. We had a strong second quarter, growing sales by 15% versus the first quarter, and adjusted EBITDA growing 124%, with adjusted EBITDA margin expanding by 600 basis points to 13%. Given the strong performance, we're increasing our Adjusted EBITDA guidance range to $150-$170 million. We were successful in our efforts to level the playing field in the U.S. ferrosilicon market, resulting in trade action against predatory Russian imports. As a result, we have a significant opportunity to increase our market share starting in early 2025. We continue to make significant progress with our Coreshell relationship, achieving excellent results in testing, validating their technology, and the use of silicon-rich materials in EV batteries.

As mentioned before, we have enhanced our capital return program by having the share repurchase program approved by the June AGM. Operator, we are ready for questions. Thank you.

Operator (participant)

Thank you, sir. As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Thank you. We are now going to proceed with our first question. The question comes from the line of Lucas Pipes from B. Riley Securities. Please ask your question.

Lucas Pipes (Managing Director)

Thank you very much, operator. Good morning, good afternoon, everyone. Good to see the solid results and the bump in guidance. Marco, you mentioned in your prepared remarks the outlook for the second half of this year, and you called out kind of Q4 as the weakest period. And if I heard you right, you cited pricing as one of the drivers for that. And I wondered if you could maybe elaborate on that, kind of given how index pricing has moved.

Over the last nine months, 10 months or so, I would have thought we would have passed the valley, so to speak, in pricing, but would appreciate your thoughts on that and how lags, mix, et cetera, might impact pricing. Thank you very much.

Marco Levi (CEO and Executive Director)

Thank you. Well, we have a good visibility on third quarter, of course, as large bunch of our business is contractually related with index pricing. This is why we have a good reading of the Q3, and we expect to at least confirm the result of Q2 and Q3. Q4 is impacted by what we see in the market. Demand is weak in most of the segments. Steel, excluding India, steel production in the world is down versus estimate, when it's not in negative territories in certain geographies, like U.S., for example. Aluminum is pretty stable in U.S., but weak, extremely weak in Europe. Chemicals are rather stable.

Solar is a significant slowdown in Asia, mainly driven by the dramatic drop of polysilicon price, but also by the new investigation of U.S. authorities, which are definitely slowing down the export of solar supply chain elements to U.S. So having this picture, we have already seen indexes weakening during the third quarter. And as a consequence, we are extremely cautious on our outlook on quarter four. So weaker volume, weaker pricing in Q4.

Lucas Pipes (Managing Director)

That is, that is helpful. Thank you, Marco. And you cited the excellent results in the Coreshell investment and technology. Could you elaborate on those results? What exactly was so positive? Was this a surprise either in terms of the results or the timing? Would appreciate your thoughts on that. Thank you so much.

Marco Levi (CEO and Executive Director)

Well, I would, I would be very, even more positive when our batteries will start getting tested by the OEMs. But in the meantime, samples will contain 80% of our silicon metal, have achieved almost 1,000 cycles of charging and discharging, with a retention of 80% of their properties. These are, in our case, unprecedented results that are justifying the move of Coreshell toward producing pilot quantities of batteries, these 60 ampere batteries, that will be tested by the OEMs. So of course, we need more and more testing. We need the real testing by the OEMs, but it looks like we are close to solve the old problem of being able to to address the swelling of silicon metal in the battery.

Lucas Pipes (Managing Director)

That is, that is really good to hear, Marco. I really appreciate those comments. Really quickly, maybe for Beatriz as well. You stockpiled some manganese ore on the back of the supply disruption. When would you expect your stockpiles there to normalize? And as it relates to kind of cash flow and working capital release, any comments as it relates to taking advantage of that buyback authorization? Thank you both.

Beatriz García-Cos (CFO)

Yes. Thank you, Lucas. Though, as I was mentioning in the call, so we have been taking advantage in Q2, so we have been seeing already the impact of lower manganese ore pricing, higher prices in Q2. And as you said, we purchased manganese ore in Q2, and we expect to see the release of this. And of course, we expect prices to hold in Q3, and therefore gonna be a positive impact in working capital in Q3, but could be offset maybe with all the business. But we expect a release of working capital overall could be more in Q4, Lucas.

Lucas Pipes (Managing Director)

Any thoughts on the buyback authorization?

Beatriz García-Cos (CFO)

Well, maybe what we said on the call and first, the AGM approved the share buyback program at the end of June, so we didn't have a lot of time to react on that, right? Because the closing period came just after. I think what is more relevant for us is when you hear Marco talking about the outlook on the second part of the year and the market conditions. We want to take a conservative approach and preserve our cash and our liquidity. So, for the time being, we're gonna be. We want to be prudent in the use of our cash and liquidity.

Lucas Pipes (Managing Director)

I appreciate that. Thank you so much for all of your comments, and continued best of luck. Keep up the good work.

Marco Levi (CEO and Executive Director)

Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, it's star one and one on your telephone and wait for your name to be announced. Thank you. We are now going to proceed- Oh, we are now going to proceed with our next question. The question's come from the line of Martin Englert from Seaport Research Partners. Please ask your question.

Martin Englert (Analyst)

Hello, good afternoon, everyone. Circling back on silicon metal and price weakness, how much of the fourth Q price weakness is associated with the weaker, weaker Asia market and maybe more favorably priced, product being exported there from South Africa, so more of a negative mix shift implicating prices, at the segment level?

Marco Levi (CEO and Executive Director)

Martin, let me talk about facts. Like in most of the businesses, China has built over capacity, and with the current crisis that they are going through, they are exporting everything that they can. We see that in silicon metal imports from China into Europe in the second quarter, which have significantly increased. Prices are extremely low, and these have an impact on the overall index. It is true that due to the quality that they export, they tend to supply mainly metallurgical silicon for aluminum, but they are definitely, you know, moving their product outside of China.

And we have seen the same, something that we need to test with imports in U.S. from Angola, where Chinese have relocated apparently some of their old furnaces, and silicon metal is exported out of Angola to U.S. The other part of your question is around solar demand. Our sales of silicon metal to Asia for solar have been rather stable in second quarter. We foresee a slowdown in the second half of the year, which is related to this U.S. investigation that basically blocks the export of solar supply chain elements to the U.S. So even the major players are concerned about being forced to pay duties in case they continue to do business.

Honestly, we believe that this situation is not sustainable for the U.S., and I can add other comments, but at the moment, the offtake of silicon metal in Asia for solar has gone down.

Martin Englert (Analyst)

Thank you for all the detail there. That's helpful. I wanted to circle back on the ferrosilicon trade case, and it seems like there was maybe some pre-buying ahead of that and elevated channel inventories. So you're expecting muted or depressed volumes in U.S. ferrosilicon throughout the balance of the year, but then you expect an uptick into 2025. Is that correct?

Marco Levi (CEO and Executive Director)

Yeah. Well, I think I also made this comment in the previous quarter. Massive quantities of ferrosilicon have been delivered to the U.S. in the last few months from Russia. And we estimate an amount of 120,000 tons of ferrosilicon. That corresponds to one year's supply of Russian ferrosilicon to the U.S. On top of it, we have seen, like everywhere else, massive increases of export outside of additional capacity of ferrosilicon out of Kazakhstan. And to combine this situation in the U.S., we have seen increased export out of Brazil, some minor suppliers of Brazil of ferrosilicon, plus Malaysia.

The situation combined with the, we estimate, the estimated drop of production of steel in U.S., about 3.3% below last year, year to date, has threatened the environment. So pricing has gone up based on the announcement of the authorities, but we don't see too much liquidity yet. I can share with you a general comment that we perceive the need of securing supply of Ferrosilicon next year in the American market, because we are getting contacted by several steel manufacturers who want to secure volumes for next year.

Martin Englert (Analyst)

Are you aware of any alternative, key sources that if these countries are blocked out of the U.S. market due to the trade case, that consumers in the U.S. may source from alternatively to kind of fill the holes? Or are they going to be largely fully reliant on U.S. production?

Marco Levi (CEO and Executive Director)

No, no, no. First of all, there is quite significant free capacity now in the U.S. We are two local players and we have capacity. Of course, we can support demand also outside of our most competitive assets in U.S. and South Africa, if needed. For sure, then you have Brazil, some of the Brazilians who can supply more, and some of the Asians who can supply more. So I don't think the U.S. is gonna suffer lack of ferro, of ferrosilicon. Remember also that we... Our plant in Selma is down as we speak, and we could devote Selma to ferrosilicon production, in a quarter.

Martin Englert (Analyst)

Okay. Appreciate all the detail and congratulations on the results.

Marco Levi (CEO and Executive Director)

Thank you. Thank you, Martin.

Operator (participant)

Thank you. We have no further questions at this time. I will now hand back to Marco Levi for closing remarks.

Marco Levi (CEO and Executive Director)

Thank you, and thank you again for your participation. We look forward to hearing from you on the next call in November. Have a great day.

Operator (participant)

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you, and have a great day.